MARIO DRAGHI, PRESIDENT, EUROPEAN CENTRAL BANK: Well, ladies and gentlemen, first of all, merry Christmas and happy new year.
You know, it’s the last time we get together before Christmas and year end, so enjoy your holiday season.
I’m very pleased to welcome you to our press conference. I will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the commission vice president, Mr. Rehn.
Based on our regular economic and monetary analysis, we decided to keep the key ECB interest rates unchanged. Incoming information and analysis have confirmed our assessment and monetary policy decisions of last month. Underlying price pressures in the euro area are expected to remain subdued over the medium term. In keeping with this picture, monetary and credit dynamics remain subdued.
At the same time, inflation expectations for the euro area over the medium term - over the medium to long term continue to be firmly anchored, in line with our aim to maintain inflation rates below, but close to, 2 percent. Such a constellation suggests that we may experience a prolonged period of low inflation, to be followed by a gradual upward movement towards inflation rates below, but close to, 2 percent later on.
Our monetary policy stance will remain accommodative for as long as necessary and will thereby continue to assist the gradual economic recovery in the euro area. In this context, the Governing Council confirmed its forward guidance that it continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time. This expectation continues to be based on an overall subdued outlook for inflation extending into the medium term, given the broad-based weakness of the economy and subdued monetary dynamics.
With regard to money market conditions and their potential impact on our monetary policy stance, we are monitoring developments closely and are ready to consider all available instruments.
Let me now explain our assessment in greater detail, starting with the economic analysis. Following a rise of 0.3 percent in the second quarter of 2013, real GDP in the euro area increased by 0.1 percent, quarter on quarter, in the third quarter. Developments in survey-based confidence indicators up to November are consistent with a positive growth rate also in the fourth quarter of the year.
Looking ahead to 2014 and 2015, output is expected to recover at a slow pace, in particular owing to some improvement in domestic demand, supported by accommodative monetary policy stance. Euro area economic activity should, in addition, benefit from a gradual strengthening of demand for exports. Furthermore, the overall improvements in financial markets seen since last year appear to be working their way through to the real economy, as should the progress made in fiscal consolidation.
In addition, real incomes have benefited recently from lower energy price inflation. At the same time, unemployment in the euro area remains high, and the necessary balance sheet adjustments in the public and the private sector will continue to weigh on economic activity.
This assessment is also reflected in the December 2013 Eurosystem staff macroeconomic projections for the euro area, which foresee annual real GDP declining by 0.4 percent in 2013 before increasing by 1.1 percent in 2014 and 1.5 percent in 2015. Compared with the September 2013 ECB staff macroeconomic projections, the projection for real GDP growth for 2013 has remained unchanged, and it has been revised upwards by 0.1 percentage point for 2014.
The risks surrounding the economic outlook for the euro area are assessed to be on the downwards - on the downside. Developments in global money and financial market conditions and related uncertainties may have the potential to negatively affect economic conditions. Other downside risks include higher commodity prices, weaker-than-expected domestic demand and export growth, and slow or insufficient implementation of structural reforms in euro area countries.
According to Eurostat’s flash estimate, euro area annual HICP inflation increased in November 2013 to 0.9 percent, from 0.7 percent in October. The increase was broadly as expected and reflected, in particular, an upward base effect in energy prices and higher services price inflation.
On the basis of prevailing futures prices for energy, annual inflation rates are expected to remain at around current levels in the coming months. Over the medium term, underlying price pressures in the euro area are expected to remain subdued. At the same time, inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2 percent.
Broadly in line with this assessment, the December 2013 Eurosystem staff macroeconomic projections for the euro area foresee annual HICP inflation at 1.4 percent in 2013, at 1.1 percent in 2014, and at 1.3 percent in 2015. So 1.4 percent in ’13, 1.1 percent in ’14, 1.3 percent in ’15. In comparison with the September 2013 ECB staff macroeconomic projections, the projection for inflation for 2013 has been revised downwards by 0.1 percentage point and for 2014 it has been revised downwards by 0.2 percentage points.
The risks to the outlook for price developments are seen to be broadly balanced over the medium term. Upside risks relate to higher commodity prices and stronger-than-expected increases in administered prices and indirect taxes, while downside risks stem from weaker-than-expected economic activity.
Concerning the staff macroeconomic projections, let me inform you that the Governing Council has decided to publish more details as of December 2013, so you will receive this material today after the press conference.
Turning to the monetary analysis, data for October confirm the assessment of subdued underlying growth in broad money, M3, and credit. Annual growth in M3 moderated to 1.4 percent in October, from 2.0 percent in September. This moderation was partly based - partly related to a base effect. Annual growth in M1 remained strong at 6.6 percent, reflecting a preference for liquidity, although it was below the peak of 8.7 percent observed in April.
Net capital inflows into the euro area continued to be the main factor supporting annual M3 growth, while the annual rate of change of loans to the private sector remained weak. The annual growth rate of loans to households stood at plus 0.3 percent in October, broadly unchanged since the beginning of the year.
The annual rate of change of loans to the non-financial corporations was minus 2.9 percent in October, following minus 2.8 percent in September and minus 2.9 percent in August. Overall, weak loan dynamics for non-financial corporations continue to reflect their lagged relationship with the business cycle, credit risk, and the ongoing adjustment of financial and non-financial sector balance sheets.
Since the summer of 2012, substantial progress has been made in improving the funding situation of banks. In order to ensure an adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential that the fragmentation of euro area credit markets declines further and that the resilience of banks is strengthened where needed.
The ECB’s comprehensive assessment before it adopts its supervisory role under the single supervisory mechanism will further support this confidence-building process. It will enhance the quality of information available on the condition of banks and result in the identification and implementation of necessary corrective actions. Further decisive steps to establish a banking union will help to restore confidence in the financial system.
To sum up, the economic analysis indicates that we may experience a prolonged period of low inflation to be followed by a gradual upward movement towards inflation rates below, but close to, 2 percent later on. A cross-check with the signals from the monetary analysis confirms this picture.
As regards fiscal policies, the Governing Council welcomes the European Commission’s assessment of the 2014 draft budgetary plans, which were submitted in October for the first time under the two-pack regulations. This new surveillance exercise needs to be fully effective. In order to put high public debt ratios on a downward path, governments should not unravel their efforts to reduce deficits and sustain fiscal adjustment over the medium term.
In particular, consolidation measures should be growth-friendly and have a medium-term perspective, so as both to improve public services and minimize the distortionary effects of taxation. At the same time, there is a need to push ahead with product and labor market reforms, in order to improve competitiveness, raise potential growth, generate employment opportunities, and foster the adaptability of our economies.
We are now at your disposal for questions.
QUESTION: Thank you very much. Sakari Suoninen from Reuters. Mr. Draghi, my first question would be -
DRAGHI: It’d be great to see you.
QUESTION: Here in the back.
DRAGHI: Oh, OK, OK. Way in the back, yes.
QUESTION: I’m hiding, cheap seats. You said you see 2015 inflation at 1.3 percent. Recently you’ve talked about your need to act in November as an inflation buffer. Do you now see that you have enough of a buffer so that it is - that deflation threat is not acute? And also, related to that forecast, you said that you see inflation climbing to the ECB’s target of just below 2 percent. Still the highest we have is 1.3 percent in 2015. Is this good enough for you? And my second question would be -
DRAGHI: That’s a third question.
QUESTION: They’re related, right?
QUESTION: OK. Mr. Constancio, you said that negative deposit rates would be only used in extreme circumstances. Could one of you maybe give us a better idea of what constitutes extreme circumstances?
DRAGHI: Thank you. Well, the first - the first message I want to leave with you today is that, after our rate cut - well, first of all, our decision to cut rates in November last time has shown to be fully justified. And the first message is that, in fact, our forward guidance is working. Our lower rate, our conformational fixed-rate full allotment extended in 2015 have led market expectations to conclude that our monetary policy stance will stay accommodative for an extended period of time. The forward curve is now back where it was in May. There have been - and we are - by the way, we are content, as you can see, with this development.
It’s a development which is fully justified by this subdued outlook for inflation in the medium term. And also it has shown greater clarity in our reaction function. Other positive consequences of that - of this set of decisions is a comment on the EONIA curve and slope of the EURIBOR curve. The yields of many non-core government bonds yields - the yields of many non-core government bonds have gone down. Senior unsecured bank bond yields have gone down. Bank bond issuance, even for stressed countries, like, for example, Portugal and Ireland, have picked up - has - yeah, have picked up, and all this without impact on the equity markets.
So there are many more dimensions that I can comment on this. We also saw some slight reduction in fragmentation. We also saw, after two months of stabilization, today data show a renewed decline in TARGET2. We also saw basically a stabilization of cross-border - cross-border relations flows at the level they had pre-crisis. So all in all, we’re seeing positive developments, both before, but especially after our decision last November. For example, we are seeing negative net issuance of government bonds, and all this without appreciable consequences on the yields of these bonds. So we’ve seen - we’ve seen - well, we can comment on this later on.
Now, all this happens - and here I’m addressing your second question, your second - or first - 1(b) question - all this happens in a situation where basically inflation expectations remain firmly anchored in the medium to long term. As both markets, but also survey indicators show, the second consideration is that, while we see the HICP path, as I’ve just discussed with you a moment ago to be what it is, we also see that inflation excluding food and energy drifts slightly higher during the horizon.
And the final point that I want to make is that it’d be wrong to think, as it is wrong to think that we decide our monetary policy on one figure of inflation, as you can see this has not been the case, as it’s been confirmed by subsequent data, it’d also be wrong to think that the effect of our monetary policy is instantaneous. It’s everything but that. There is - it needs time to fully produce its effects.
And we may comment on this later, by the way. The time, the extension, the length of time that it takes depends on many factors, but certainly on a couple of factors very important. What is the state of the banks’ balance sheets? And what is the state of the private-sector balance sheets?
The greater is the leveraging process that both actors, banks on one side and corporates - and corporates on the other side have to take, the longer will be the time that our monetary policy will take to exert its full impulse. And that is why the AQR, the asset quality review, is so important, because actually it can shorten this time. But we can come back on this later on.
STAFF: Johanna Treeck, Market News?
QUESTION: Johanna Treeck. I’ve got two questions for you. Number one, earlier this year, you said you would give us - update us with news on a potential release of minutes or summaries of your deliberations on the Governing Council. As you pointed out, this is the last meeting this year, and we still didn’t hear anything, or can you actually enlighten us whether there has been a decision?
My second question is, the ECB Governing Council members have cited a number of possible policy measures, including negative interest rates and quantitative easing, some of which would be seen as very extreme, especially in the context of the euro zone. Nobody has ever mentioned the option of FOREX interventions, though. Does that mean that that’s not a tool that the ECB would be ready to consider? Thank you very much.
DRAGHI: Thank you. On the first thing is - on the first question about the minutes, we are - we have started working in the executive board, and we are continuing to work. It’s a very complex issue. It doesn’t - it has many dimensions. The one that’s most popular is whether the name or who does what or to be there. There are many other issues, especially for institution that never had minutes before.
So we are preparing our proposal for the Governing Council, which, by the way, today has already discussed to some - to a little extent, to some extent this issue already. So we are moving forward, a slight late. The delay is justified by the complexity of the issue, frankly.
On the second point, well, you know what the policy of the ECB and the other major central banks is, exchange rates are a matter of common concern. So the - and they’re not a policy target. By the way, I’ve said this on and on. So they’re not a policy target. Our policy target is price stability in the medium term. However, the exchange rates are important for price stability, as we are seeing today, and for growth. So we keep this into account in our monetary policy decisions. The experience of what you are saying unilateral FOREX intervention is not contemplated by the current G-20 agreements. Thank you.
STAFF: (inaudible) CNBC?
QUESTION: Thank you very much. My first question would be actually on the potential new LTRO or if you would consider something like the Bank of England’s program, funding for lending, above all looking at the ever-decreasing lending activities as an aggregate? And my second question would be, you’re always saying that you’re watching money markets very carefully and you have all available instruments at your hands or in your hands. What has to happen to use those instruments? Thank you.
DRAGHI: Thank you. I think I can respond to both questions with one answer. The - our discussion today has not - basically, the message is - the message the Governing Council sends today is that we are ready and able to act within the forward guidance framework. Forward guidance is there. The - we have not identified amongst the various, numerous instruments we have one specific instrument in the discussion we had today. We had a brief discussion about negative deposit rates, but it was brief.
That is one point I want to make. So readiness to act, ability to act within the framework of the forward guidance, but a variety of instruments ready - technically ready, they’ve been worked out, so they’re there. Brief discussion on negative deposit rates.
On the LTRO specifically you mentioned, I would take this opportunity to make a point here. When we made the LTRO two years ago, the level of uncertainty was very high. And therefore, the long-term liquidity, three-years term liquidity was justified by that level of uncertainty.
Furthermore, the LTRO - we view the LTRO as a very successful monetary policy measure. It did avoid severe further credit contractions at the time due to lack of funding. The funding situation was extremely stressed. You remember - I’ve told you several times - we had 250 billion euros of bank bonds due within one term, within one quarter, and we had more than 300 billion of government bonds coming due within the same quarter. And this was coming after the second part of 2011, which had been a period of increasing dramatic stress, of stress dramatically increasing.
Now, today the situation is, fortunately, substantially different. The level of uncertainty is considerably lower. And that is one consideration to keep in mind.
The second consideration is that the use that these banks have made of this liquidity was mostly for buying government bonds. And it’s, I think, basically a fact of this experience that not much of this actually found its way through the economy. So if we are to do an operation similar to the LTRO, we’ll want to make sure that this is being used for the economy. And we want to make sure that this operation is not going to be used for subsidizing capital formation by the banking system under these carry-trade operations.
STAFF: Brian Blackstone, Wall Street Journal?
QUESTION: Yes. Brian Blackstone with the Wall Street Journal. Can - I want to get back to this point about all these numerous policy options you have. And maybe you could give us some verbal meeting minutes and just run down them and just give us a sense of what the state of play is on the thinking - for example, negative deposit rates. You talked about it briefly. What did you talk about? Asset purchases, what kind of discussion do you have about these things? And why are they good ideas? And why aren’t you really implementing some of these yet?
My second question - I want to go back to something you said last month about the fundamentals in the euro zone being probably the strongest in the world. If that’s the case, why wouldn’t - first of all, why do you have such a weak economic growth forecast, just 1.5 percent in 2015? But wouldn’t an economy with such good fundamentals respond to stimulus from the ECB from fiscal policy? Thank you.
DRAGHI: Thank you. On the first, I really have to say again what I said before. No specific instruments have been identified by our discussion, and the - I would say the level of preparedness is pretty high on all of them. So we don’t think further - we don’t think - we don’t know - we don’t need any further analysis on that.
But then the key question is, any use - any further use of these instruments, would this be justified by the current medium-term - assessment of the medium-term outlook for inflation or not? I think that’s the key question. As I said after our decision in November, we’ve seen that markets have responded. The impact has been quite strong to our forward guidance. And this has worked. And inflation expectations are firmly anchored.
So we will - however, have said that, we’ll certainly closely monitor any developments. And let me say that we are fully aware of the downside risks that a protracted period of low inflation, of low inflation for an extended period of time does imply.
The second point is I - yes, in a sense - in a sense, the fundamentals of the euro area are strong in a sense, because the major policy mistakes of the previous years are on the way to be corrected. The euro area can’t afford doing the structural reforms it needs. In this sense, the fundamentals are strong. To generate growth, you need stimulus, but you also need to correct the structural imbalances. You have to - you - not you - the governments of the euro area, the ones who need, have to undertake the structural reforms they have to do. There’s no doubt that low growth is the outcome of economies that need to have structural reforms in both - as the introductory statements just said - both in the product and in the labor markets, but not only there, in many other sectors, in education, the judiciary.
So it depends. Each country has, in a sense, their own specific list of work that they have to do. And so the stimulus, we have discovered, by the way, that neither growth nor equity can be expected from endless debt creation. So when we use the word stimulus, we’ve got to be very, very careful here. And the reality is that the economies have to be prepared, structurally prepared for the stimulus to actually produce its effect in a sustainable way.
QUESTION: (OFF-MIKE) yes. You said before you discussed briefly about the negative deposit rate. And since I hear some voices here in this house that if you go into this negative territory and then parallel to a rate cut both interest - main interest, yes, will be then lowered simultaneously with going to this negative territory, and so my question is, was today the discussion about these both decisions at the same time? I mean, there was a discussion about rate cut and if not. OK, that’s the first question.
And the second one about exchange rates. In February 2013, exchange rates were mentioned in the statement as risks, downside risks for the growth. This is not the case, so do we have to consider that exchange rates are not really a risk, but at the time in February, the exchange rate dollar was 1.35 with the euro, nearly the same like today. So euro zone must come along with this high exchange rate? It is not really as a risk?
DRAGHI: Thank you. No, when I said no to your first question is that we didn’t have - we had a brief discussion, which was not in any sort of depth or any - didn’t touch on any technical aspect of this - of this measure, possible measure.
On the second point, basically, the fact that the statement isn’t there doesn’t mean anything. I mean, the exchange rate is - as I said, is important for price stability and growth. And the levels are by and large the ones that were there when the statement was in.
So we are watching. We are watching the exchange rate. And it’s one - but keep in mind, again and again, it’s not a policy target. It’s part of our information set that leads us to take monetary policy decisions, the objective of which is price stability in the medium term.
STAFF: Margarita Peschoto (ph) from Economico (ph)?
QUESTION: Good afternoon. We are - in Portugal, we are six months from ending the adjustment program. In what conditions do you see Portugal exiting this program? And second question, if you think that a negative decision from the constitutional court might question this exit. Thank you.
DRAGHI: Thank you. I’ll say the progress in Portugal has been very, very significant. The government and the economy and the population have made an extraordinary progress in addressing the shortcomings that were present at the beginning of the crisis. And the prospects for a return to market financing have clearly improved. It’s also quite clear that strong implementation of the program conditionality is absolutely essential and should be continued. So that’s what I can say at this point in time.
One has to keep in mind that the initial structural weaknesses of the Portuguese economy were very serious, were very serious. And so this implies a much more complex program of adjustment within which, I have to say, the Portuguese government has done significant - has achieved significant progress. And also, I would like to ask Constancio, Vitor, if you have - you know - you know something about Portugal, so -
CONSTANCIO: Yeah. You said it all, in what regards the progress in the adjustment, which is clear, in particular in what regards the external accounts that came from big deficit to a situation of balance, and even a small surplus, which is now foreseen. That was, of course, very costly adjustment, but it was done.
Also, progress in the fiscal position of the country, in terms of a reduction of deficits. So also in terms of competitiveness indicators, all these components of the adjustments have been achieved. And now everyone - meaning all the international institutions - are forecasting some growth for next year, which is the result of what has been achieved.
STAFF: Max (inaudible)
QUESTION: Yeah, Max (inaudible) thank you. My first question is on - you said that the decision has shown to be fully justified, the November decision, including the interest rate cut. Is this an assessment that was shared by all Governing Council members today, as we know that there have been some divergence of views last month?
And my second question is, you said that the quick question for further action would be whether they are justified or not. Regarding that, all that - that negative deficit rate and also quantitative easing are seen as very extreme instruments, would you say that these instruments are only justified if there is a serious deflation threat for the euro zone as a whole? Or would it also be an option just to support the economy if growth is too low and inflation is low? Thank you.
DRAGHI: Thank you. Well, first, the first question, I - I - once we take a vote about a decision, we never take a vote to decide that, say, three weeks later whether that decision is justified or not. So we vote only once, basically. We had vote - we rarely vote. We sort of - sometimes like we did, like last time.
But I should say - and you should know, because it was a public statement, that this agreement at that time was whether to do it then or later. It was not in substance, so much so that some of the ones who disagreed at that time later stated fully that it was fully justified. So it’s - and going beyond council members’ views and opinions, I - when I say it’s fully justified, I look at the facts, at the market’s reaction, at the rates, at a list of things that I briefly commented before, bank bonds issuance, yields, and so on, the repositioning of the forward curve to what it was in May, so that is the point.
On the second point, you’re actually asking a very hard question to answer. Which instrument would we deploy against which contingency? And we are not - we haven’t really done any reflection on that. We know we have a powerful artillery of different instruments yet available. We do believe that our decision last - in the last Governing Council, monetary policy decision was - as I said - right. And the subsequent events have shown that that was justified, that our forward guidance has been substantially successful, that, in a context of inflation expectations, which remain fully anchored, in a context of an inflation constellation that I’ve described before, where the known full energy components drift slightly higher, so - and in a context where we have to acknowledge that our monetary policy decisions are taking time to exert their inputs.
So that’s the state of us. And we - frankly, it’s too early to speculate for such future courses of action.
DRAGHI: Christine asked me to stay longer, by the way, today.
QUESTION: Thank you. A question for President Draghi, please. As you may be aware of, the letter that your predecessor, Mr. Trichet, sent to the Spanish government in the early days of August 2011 was just published as part of the memoirs of former Prime Minister Zapatero. How did you assess - what’s your opinion on the publication of a restricted document in a book with commercial purposes? And also, if you could remind us why it is document where an E.U. institution gives recommendations on fiscal and economic policy had to remain in secret?
And if I may, a quick follow-up question on your comments on the LTRO. Should a new one take place, how do you intend to control the use the banks make of the money? You cannot mark the notes, so - thank you.
DRAGHI: Let me respond to the second question first. You’re absolutely right. That is - there are two dimensions to decisions like this. The first is when it’s needed. I didn’t say anything about this to be needed tomorrow. Well, just sort of in abstract, regardless of when.
The second dimension is, its practicality, its capacity to actually achieve the targets for which it’s been designed. Now, work has been done on this front, but this is exactly one reason why - and I remember discussing with you this a year ago, a year-and-a-half ago.
When you were asking the same - well, why haven’t you linked this to actual credit? And the things is that it’s - as we’ve seen in U.K., it’s already complex in one country framework. In 17, 18 countries’ framework, it’s going to be even more complicated.
But I - as I said, work has been done on this, too, but we should not ignore the practical complications stemming from measures - from generally measures like these. It’s - yeah. It’s like when people say, ah, the ECB should buy assets. Which assets? And I don’t want to start a discussion on that, but that’s another - that’s another thing. You can like this in theory. In practice, you have to ask yourself, what do you mean?
And so - but as I said, lots of work, reflection, papers have been written on this, so when time comes, we’re going to be ready, if this time will ever come.
Yes? I’m sorry. On the letter, I’d rather - frankly do not comment on these. These are really issues specific to a certain country, and I just don’t want to comment on that, please.
QUESTION: (inaudible) an opinion is expected of the ECB on the recent changes announced in Italy to the Bank of Italy shareholding structure. Could you tell us if you have this opinion? When is it going to be published? And can you tell us what it is?
You also mentioned numerous options, several were already mentioned, like negative deposit rates and some form of purchasing assets. Are you also considering stopping or at least reducing the amount of stabilization that you do of the SMP purchase?
DRAGHI: No, on the - on the point - on the first question, the opinion has - the ECB opinion as its current practice has been circulated to all the national central banks in what is a written procedure. And comments are - the national central banks are - as its current practice - expected to send their comments.
I don’t know. I, frankly, ignore (ph) what is the state of this written procedure. The opinion has not been adopted yet, so that’s the state of the situation now.
On - I’m sorry, the other question was?
QUESTION: (OFF-MIKE) SMP (OFF-MIKE)
DRAGHI: Oh, the SMP. Well, we are - I mean, we are - we have marginally touched on this, as well, today. We have discussed the - there are two issues there. One is the liquidity creation that will accompany such a measure. The other one is to - the awareness that this liquidity creation takes place - or the liquidity absorption, anyway, takes place in a context of fixed-rate full allotment, and so the two tend to compensate each other. So we are - we are sort of reflecting on this issue.
QUESTION: (OFF-MIKE) Financial Times. Mr. Draghi, in both your opening statement and in your comments today, you placed a lot of weight on inflation expectations in the medium to longer term, remaining anchored around the target. But in Japan, those expectations moved a little bit late. They didn’t really tell us anything that we - until it was too late for the central bank to do anything. I mean, given that, how appropriate is it that you’re placing so much faith in these inflation expectations in warranting not doing more now?
And just a second question, if I may. You’ve mentioned in recent weeks that lower than target inflation in the periphery may be appropriate, given that it’s a corollary of more competitiveness, but at the same time you said that inflation in the euro zone overall needs to be anchored around the target. How can you say that inflation that’s a third below target over the monetary policy-relevant horizon is really a suitable anchor there?
DRAGHI: Thank you. On the first question, I think that the situation is - in the euro area is quite different from what it was in Japan in the ’90s and early 2000s. Let me give you a few reasons.
The first is, actually, what we’ve just discussed. We’ve taken - if you look at what we’ve done in the last year, year-and-a-half, we’ve taken decisive monetary policy measures of great significance at a very early stage, even when it - as a matter of fact, inflation was not at the levels at which it is today, was - was way higher and way closer to 2 percent. So - and this was not - didn’t happen in Japan.
The second reason why - by the way, this is an interesting comparison, which you can imagine, we sort of look at it with great - great attention. But there’s a second reason why this comparison isn’t actually there, at least.
We are in the process of actually doing the AQR. You’re aware that the situation in Japan lasted much longer than it should have because the balance sheets of the banking system and of the private sector were burdened and had to be deleveraged. And the action to conduce, to induce this deleveraging lagged for many years.
The AQR will - is expected to produce this action. And as a matter of fact, this action has already started - is actually in its course right now, much of it - well, some of it is actually taking place before, even before the AQR is being implemented. So that’s a second reason.
The third reason is that the situation of the private sector balance sheets is not at all comparable of - in the euro area is not at all comparable with what it was in Japan at that time.
The fourth reason is that the countries in the euro area have made significant progress in addressing their structural weaknesses. Now, in some countries, the progress towards structural reforms have been slower, in other countries, faster, but you see that the situation today is completely different from what it was two years ago. And that’s a fourth reason of difference between Japan of the ’90s, 2000s, with us today.
But there is one fifth reason. As a matter of fact, if you look at inflation expectations in the euro area, and the corresponding inflation rates, you would see that, in Japan, the inflation expectations were disanchored quite significantly and for a long period of time, which is not something we’re seeing today.
Your second question was about whether the - whether the - yes, yes. Well, certainly. I mean, that’s why we acted. I mean, we acted because we think that the outlook - the medium-term outlook for inflation is subdued and stays subdued for a long period of time and, as a consequence, it makes the adjustment - the relative price adjustment across countries more difficult. There’s absolutely no doubt that it’s much easier to adjust if you have an inflation of 2 percent than if you have an inflation of zero because of the rigidity of price and wages, the downward rigidity of nominal price and nominal wages, and that’s why we acted.
And that’s why - as I said before, we are very aware of the downside risks that a protracted low rate - the low rate of inflation - the too-low rate of inflation for a protracted period of time might have. And that’s why we stand ready to act.
QUESTION: Mr. Draghi, OK, among the - the broad range of instruments that the ECB has, the artillery that you referred to, my understanding is that there’s also just as part of a discussion the possibility of proceeding to some kind of quantitative easing. So my question is, I want you to get into details of this, because I know it’s not possible, because it’s just a discussion, but in case this would happen, would it - would it be - would those asset purchases only focus on bank securities, bank securities? Because the ECB already has in place a program for government bonds that is the OMT. Thank you.
DRAGHI: Thank you. And I’m sorry, I have to say what I said before. We have not identified any specific instrument in today’s discussion. We only - as I said, the message is, we have - we have instruments, they are there, there is a sizable variety of instruments, and that’s - and we are ready and able to act within our forward guidance framework. Thank you.
QUESTION: Thank you. Mr. Draghi, I have a question concerning the asset quality review with the specific aim of rebuilding confidence in the balance sheets of banks. And I’d come back to the point already briefly touched on by previous speaker, the move in Italy to revalue the shares of the bank of Italy and, secondly, in Spain, the recent decision by the finance ministry to allow to convert the deferred tax assets into capital backed by government guarantee in case the banks are not making enough losses, so the deferred tax assets actually materialize.
So do you think these two moves, which are unrelated and two different cases, and each of which must be considered of its own, but they kind of - in the press, you read like there is a certain pattern of creative accounting in the run-up of the balance sheet assessment. Do you agree on this? Or do you completely disagree?
DRAGHI: We will come - we will come to discuss these specific measures when we’ll actually come to examine - first of all, some of them - probably both of them are not in place yet. So - and they are not laws, as far as the Italian one is not a law at all. I don’t know about the Spanish one. So we will discuss them when they come into being, and we’ll discuss their impact.
But let me make a more general point about the AQR. AQR is useful if it’s credible. If it’s not credible - and to me - to say that it’s credible, it means that it will shed light onto the bank’s balance sheets so that the private sector will find convenient, profitable to invest money in the banking industry of the euro area or to lend money in the banking industry - to the banking industry in the euro area. And banks will find a feasible proposition to lend and borrow from each other. I mean, that’s the ultimate test of credibility.
It’s quite clear that the more we trick around with concepts, the less the test will - the less, in a sense, the outcome will be credible. So we have to be - whatever comes, we’ll be judged in all these developments in their own - according to their own merit and substance. We’ll have to see what that is, but the general line is that the ECB and the - and all the other parties that work on this exercise want to achieve a fully transparent exercise. And that’s also the reason why - someone has asked before this - communication with the private sector about this process will be continuous. Thank you.
QUESTION: The European Commission fined several banks yesterday. I wonder, how concerned are you by the benchmark rates rigging scandal for the financial stability and the transmission of the monetary policy?
DRAGHI: Yeah, well, it’s really a matter for the commission to answer. It’s not a matter for us. We are - this is - as far as the fines, the fraud, the criminal aspect of this is really a matter for the commission.
If we look at the - at this from another viewpoint, another angle, namely the - what all this does to the reference rate, I would say, again, it’s a matter for the commission to elaborate a reference rate that could stand against all these negative developments and come out to be stronger with respect to these things.
And the ECB is working together with the commission, so we are not in a driving seat. We’re certainly working - we’re working with them, because the reference rate is an important concept for a central bank. Thank you.
STAFF: Jack Ewing, International New York Times?
QUESTION: Thank you, Mr. Draghi. You may have seen today that the U.S. GDP growth was faster than expected. And that’s bound to increase speculation that tapering will come sooner than people had expected. And I’m wondering what consequences you might see for the euro zone, if, in fact, the Fed starts tapering sooner than people had expected? And how concerned are you about that? Thank you.
DRAGHI: Thank you. Generally, I mean, we’re not commenting on other central banks’ monetary policy actions. But on the consequences, what I can say and what the facts show is there have been quite limited spillovers at the time when - you remember when it was in - can’t remember, June, July -
(UNKNOWN): May, 22nd of May.
DRAGHI: - May, when it - when it all of a - looked - all of a sudden looked as if this tapering could be happening sooner, rather than later. There were not extensive consequences on the bond markets, more generally in the financial markets of the euro area, while the consequences of emerging market countries were actually much more visible and significant.
Second point is that that - precisely that episode might have injected an early re-pricing of assets, which actually could further protect from unwanted consequences the euro area. Thank you.
STAFF: Gentleman in the middle?
QUESTION: (OFF-MIKE) Paul Gordon from Bloomberg News. Just to come back to the meeting that you’ve just had, it wasn’t clear to me if anyone at all at that meeting is calling for either a cut or an increase in one of your key - one of your three official rates. I wonder if you could answer that.
And, secondly, as you go forward, if you do see the need for more easing on your main rates, are you now considering smaller steps? Because, obviously, if you take a quarter-point cut from the current benchmark, you’re at zero. Would you consider smaller cuts in that or the deposit rate?
DRAGHI: Well, on - the first question is - since I answered, there was basically no proposal to cut rates for the reasons that I’ve explained, that our decision last month was justified by facts and had produced exactly the desired outcomes. And - and given all the reasons I gave about inflation - the inflationary environment and the time for our monetary policy decisions to - needed to for them to exert - to explain to the final effects, there was no - no sense in having a discussion of another policy action today.
On the other - I would say, I have to answer in the same way I’ve answered several times. We have a full array of instruments, and I’d rather use the word array rather than artillery, because it’s just comes - it’s militaristic language - that array of instruments and - panoplia also would be OK? And - but we haven’t identified any one specifically today. Thank you.
STAFF: We’ll give our final question to the gentleman here in the middle.
QUESTION: Thank you very much. Good afternoon. I’d just like to ask about the SSM. I understand -
STAFF: Could you just please state your name and (inaudible)
QUESTION: Tristan Carlyle from the Central Banking Publications. Daniele Nouy has been given the approval from the economic - the Committee of Economic and Monetary Affairs today, and that leaves the position of vice chair, which I understand the executive board will be nominating one of its members. Could you perhaps comment on the progress towards that and whether more than one member has expressed an interest in the job?
DRAGHI: A certainly comment (ph) on that. We are reflecting on this. We’d also want to talk to Daniele, who - we’ll see also what her views would be. And so that’s the - certainly, our conviction is that the sooner the supervisory board is put in place, the better it is. We are - incidentally, we already have the benefit of the national (inaudible) authorities experienced in supervision, because there is what we - what’s called a high-level group of advisers, where they are - which they attend. I chair these meetings, and they really are very active in making the SSM progressing and in working on the AQR.
So there are two - I would say two branches of action. One is the preparation for the SSM. And the other one is the preparation for the AQR and the stress tests. They’re all present there, and I think I take this opportunity for thanking both the national authorities, but also the ECB staff, which has been - which both of them have been wonderful in the amount of work they’ve done so far.
If you think - it’s not an insignificant amount of work to do an AQR for more than 130 banks across 17 or 18 countries or to create ex novo an organization and institution which is going to supervise the banks, all the banks of the 17 and 18 countries in close cooperation and using the national experiences. Thank you.
STAFF: Thank you very much. It was the last question. And we had - no, we’ve had 10 minutes more than usual. Thank you.
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